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Effective Vendor Risk Management Process

How To Establish An Effective Vendor Risk Management Process

Unanticipated threats can impact your company’s earnings, damage your reputation, and even force you out of business. Often, organizations are exposed to these threats by external vulnerabilities in their third-party partners. Maintaining an effective vendor risk management process allows for greater insight into who exactly your third parties are, the potentially costly risks they can pose, and a more optimized supply chain for profitability.

Woman thinking in warehouse looking at laptop for logistics

What is Vendor Risk Management?

Vendor risk management is the process of pinpointing, assessing, and mitigating risks to an organization's performance that are associated with third-party vendors.

With open markets enabling materials and production to be sourced across the globe, companies now rely on thousands of third parties to help them generate their bottom line.

Working with outside vendors is great for business efficiency. But it also brings risks. When you partner with third-party partners, you expose yourself to any vulnerabilities that exist within their infrastructure.

Why is Vendor Risk Management Important?

With regulations growing tighter, bad actors learning new disguises, and data growing more complex, vendor risk management acts as a main defense against third-party risks that can pose costly disruptions. These risks fall into a few broad categories:

Operational Risk

Relying on third- party vendors to complete critical business functions creates vulnerabilities in your company systems. These threats are especially critical when they lead to a data breach – like in 2017, when hackers obtained 143 million customer records from Equifax by exploiting a security vulnerability with one of its partners.

Compliance Risk

Partnering with third parties impacts your business’s ability to comply with legal requirements. If your vendors violate labor, environmental, or cybersecurity regulations, your organization could be held responsible.

Financial Risk

Events like the Colonial Pipeline cyberattack have put the financial risks of working with third parties on full display. American businesses suffered millions in losses, airports were forced to find other fuel suppliers, and gas stations up and down the East Coast were left without fuel. Working with third parties exposes vendors to a number of financial threats, such as paying fines for compliance violations and losing business due to operational disruptions.

Reputational Risk

All of these types of risks can affect your company’s reputation. When you fail to safeguard customer information or suffer a severe business disruption, you’re also likely to experience negative publicity that can diminish your reputation.

Vendor Risks to Monitor

Managing third-party risks is essential for any organization to protect against a wide range of potential vulnerabilities like these:

Supply Chain Disruptions

Since the start of the pandemic, more than 94% of Fortune 1000 companies have experienced supply chain disruption. Shipping delays have exacerbated the problem, with only 40.4% of cargo ships arriving on time as of March 2021 – down from 70.3% a year earlier. Forward-thinking organizations conduct scenario planning and implement continuous monitoring to proactively identify threats and adapt accordingly.

Fraud

In a September 2020 survey, 90% of fraud prevention leaders said that they expect fraud to increase over the following year. Companies that take advantage of analytics and machine learning to identify risks are able to slash their losses from fraud.

Ethical Violations

Organizations that rely on a complex web of suppliers raise the risk of being linked to companies that engage in questionable practices. Working with partners that engage in human trafficking, violate environmental regulations, or practice discrimination exposes your company to reputational risk. Even worse, it enables organizations with deplorable practices. Data is a critical tool to unravel your complex network of supply chains – and ensure that your vendors are operating ethically.

Challenges in Effective Vendor Risk Management

Today, organizations are working with an increasing number of third parties and sharing greater access to their organizational data, leading to a variety of challenges in managing vendor risk:

Vendor networks are becoming more complex than ever. In one 2019 study, 71% of compliance leaders said that they expected their vendor network to grow over the next three years. 60% reported that they're now working with over 1,000 third-party vendors. In turn, each of those suppliers has its own suppliers, partners and subcontractors. Vulnerabilities can arise anywhere within this vast network that pose a threat to your organization.

Building an Effective Risk Management Program

Keep these priorities in mind as you build your risk management program:

Identify your highest areas of risk. Strong risk management programs can track a wide array of risks. But keeping tabs on too many risks can quickly become overwhelming. That's why most organizations zero in on a few categories that make the most impact on their business.

Effectively calculate risk. Every program needs a way to effectively calculate risks. Many companies use a risk matrix that maps the likelihood of the risk against its potential impact on the business. By utilizing objective data, effective risk management programs can determine how often specific threats have occurred in the past to estimate their likelihood. To determine potential impact, organizations often use both data-driven measures (such as estimates of financial cost) and qualitative measures (such as expert opinions on potential legal and reputational damage).

Vendor risk management grid

Continuously monitor your portfolio of suppliers and vendors. Far too often, organizations focus most of their efforts on due diligence at the start of the vendor lifecycle. With continuous monitoring, you can create alerts to flag emerging risks based on vendor business metrics, financial filings, news reports, and more. By implementing continuous monitoring, you can act quickly to manage risks as they arise -- and avoid reputational damage.

Use automation to track vendors. With the complexity of today's vendor relationships, it's vital to move away from manual processes. Leading organizations focus on building a faster and more efficient risk management function by identifying and automating repeatable tasks — like onboarding, screening, due diligence, and routine evaluations.

How Data Drives Effective Risk Management

Using a data-driven approach is an ideal way to stay abreast of the ever-increasing complexity of your vendor network. That's where access to a comprehensive, trustworthy source of data can dramatically simplify your risk management operation. With supply chains increasingly volatile post-COVID-19, this data is needed more now than ever.

Let’s look at some key strategies for building a data-driven risk management function:

Ongoing Risk Monitoring

Many organizations continue to take a traditional approach to risk management, spending most of their time and energy on manual upfront due diligence before contracting with a vendor and again at recertification. It's critical to take a data-driven approach that enables you to check for risks on an ongoing basis.

Automated Reporting

While continuous monitoring is becoming increasingly important, the complexity of vendor networks makes the process more resource-intensive than ever before. Leading organizations typically spend over 20,000 hours per year monitoring compliance risks. Implementing automation to cut down on manual tasks can yield up to a 50% savings in internal resource requirements.

Regularly Updated Data

To stay on top of emerging risks, it’s critical to have up- to- date data. By utilizing automated processes, you can efficiently pull in updated information throughout the entire vendor lifecycle. By using comprehensive, trusted data sources, you can always be confident you have thorough, accurate, and unbiased information about vendors and suppliers that will keep you on top of emerging threats.

Vendor Risk Scoring

Risk scoring is another critical strategy for streamlining your process and reaching clear, objective assessments of your vulnerabilities. Effective risk scoring allows for simple, standardized assessments that consider a wide range of dimensions, including operational risk, transactional risk, compliance risk, financial risk, and information security risk.

Clean and Consolidated Data

As leading organizations continue to invest in data and analytics to monitor vulnerabilities, it's critical to ensure data integrity. Organizations need to cross-check and validate data to pinpoint inconsistencies, fill in gaps, and avoid duplicated efforts.

How to Implement Effective, Data-Driven Risk Assessment with Dun and Bradstreet

Bringing all of this together is no easy task. Dun & Bradstreet provides 90% of Fortune 500 companies with industry-leading business data, informing intelligent actions that deliver a competitive edge and help organizations grow and thrive.

Powered by the world’s largest source of commercial data, the Dun & Bradstreet Data Cloud, Dun & Bradstreet offers leading risk management data, tools, proprietary risk scoring, and insights that help compliance and procurement professionals make quicker, more informed decisions.

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